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Electronic Arts: Making Up for Missteps

Troy Wolverton

Electronic Arts isn't necessarily known for its groundbreaking games.

Sure, the company has had some innovative titles, such as The Sims. But its basic business is updated iterations of key franchises, such as Madden NFL and its Need for Speed racing titles.

That model has served EA well, and the company is now the largest independent video-game publisher.

But there are signs that that model won't work as well now, in an industry making a difficult move to a new generation of game technology. Although the transition has been tough on all the publishers, EA has been hit especially hard. Indeed, over the last two years, the company has endured stagnant sales and slowed earnings.

EA has blamed most of its problems on deteriorating market conditions and investments in a wide range of new game technologies. But the company also has been hurt by some of its own missteps.

In recent months, EA has delayed a number of high-profile titles, while other games, such as the latest iteration of Madden NFL, have received tepid reviews. And despite the company's massive investment in next-generation games, the top-selling title on Microsoft's (MSFT Quote) Xbox 360 console to date is made by chief rival Activision .

At the E3 video game conference last week, I talked with Paul Lee, the new president of EA's worldwide studios, about problems the company has been facing and some of the steps being taken to turn things around.

TheStreet.com: Timeliness has been an issue for EA of late. You've delayed Godfather. You delayed Superman. Medal Of Honor: Airborne is also delayed. What's going on? Why are you having so much trouble meeting deadlines?

Paul Lee: One of the things that we're betting on is ... more and more of the [next-generation] games are going to need some form of open-world game-play. And the reality is that open-world game play is just a much more significant undertaking than we would have imagined. But to rush it out and not get that right doesn't get you the learning you need. And I think we made the right decision to do that with Godfather, and I think the reviews and the product sales show that. We are pushing the envelope.

You take Superman. We're talking about an open-world game with 3-D flying. I mean, no one's done that. No one expects us to be that ambitious with a movie title, but it's really important for the technology and game engines that we're building for the next-generation machines. Medal Of Honor, where you can jump out of a plane and land anywhere [to] start your game, again, no one's tried that.

It's incredibly important for us to make the right investments and get the technology and the game-play right for the growth in this coming generation of consoles.

Open-world gaming seems to be one of the buzz phrases of this E3. Sure, Grand Theft Auto has been successful with its open-world framework, and, theoretically, offering gamers more choice in how they play games is a good idea. But is there any sense that gamers really want that?

Paul Lee

It doesn't have to be a fully open-world game like Grand Theft Auto, but I think open-world elements of a game, where you're not moving and reloading, going from platform to platform, I think that is really compelling.

And I think consumers are going to expect and demand that in this generation of machines, more so than they did in the past generation.

EA seems to be placing more and more emphasis on developing its own content, as opposed to licensing it from other content owners. Do you have any targets on what percentage of your business you want owned IP [intellectual property] to be?

Our goal is to get over 50%.

In terms of developing new IP, you signed the deal with Steven Spielberg. How soon before we see some of the fruits of that?

I don't think we're prepared to announce that yet.

Are we years out? Are we months out?

It won't be months. It will either be in our fiscal '08 or '09 is my guess. You know, either late of one or early of the other.

The investment community seems to love owned IP because they think it offers higher profit margins. But THQ CEO Brian Farrell said to me that the margins on owned-IP games end up being about the same as those of licensed games, because the licensing costs come out about the same as the marketing costs for new IP. What's your take on that?

Again, this is one of those things where you can be right on both sides. On the one hand, you save margins [with owned IP], because you're probably saving 10 to 20 percentage points. On the other hand, if you do your own IP, there's not that built-in awareness of a particular property. You have to spend a bit more on marketing. But the third part of it is -- that doesn't get talked about a lot -- your ability to create games.

Increasingly, licensors are increasing restrictions on what you can do, how you can treat the properties, your ability to build a great game for the consumer. You know, their requirements for marketing guarantees and additional tie-ins for a license. So, at some point, there are some licensors that are just great to work with, and, of course, there are some that are just really hard to work with.

Nintendo President Satoru Iwata's critique of the video-game industry is that developers and hardware makers are too worried about making games that look great and aren't spending enough time worrying about making them fun to play. How do you respond to that?

I think what we're proving, and what the industry's proving, is they both can be right. On the one hand, Nintendo has done a phenomenal job of broadening the market with innovative game-play. You've really got to hand it to them. At the same time, you're seeing Microsoft and Sony be fairly successful -- and us be successful as well -- on great-looking games. Because the consumers do value graphics as well as [game-play].

There [have] been countless games in our industry that have looked great and didn't play particularly well. Going forward, there's going to be a lot of me-too products that look great -- because they all look great -- that aren't necessarily going to do great. But if you take a look at what we have -- you know, Spore is innovative game-play, and at the same time it's got great graphics. And I think that's what really knocks it out of the park.

Innovative game-play helps drive [the cause] of gaming. And if you can do that, and you can have great graphics, I think that the market is bigger than just having one of the two.